Recent media coverage has highlighted that over 500,000 individual taxpayers are caught in the ‘60% tax trap’. The 60% just refers only to Income Tax. Any National Insurance and Student Loan deductions are on top of this, making an eye watering marginal tax rate for those affected.
Who does it affect?
This affects individuals with annual income in the £100,000 and £125,140 band. There has been no change in the £100,000 limit since it was introduced back in 2010. In this income band, the £12,570 personal allowance is tapered away by £1 for every £2 of income. This effectively increases the 40% higher rate by half as much again, making a marginal rate of 60%. Once income reaches £125,140, the personal allowances is fully tapered away and those higher earners pay 45% additional rate tax on earned income above that threshold.
What planning measures are there?
There are some measures which can mitigate the 60% tax trap:
Pension contributions are a particularly useful way of avoiding the trap, if HMRC will fund 60% of the cost. However, not all types of income class as net relevant earnings, which the taxpayer needs to have to be able to contribute. Please speak to a regulated financial advisor. As a word of warning, the October Budget might see changes to pension tax relief, including the possibility of tax relief being restricted to a flat rate.
Gift Aid Donations made to registered charities can reduce your taxable income
It might be possible to move income producing assets between spouses and civil partners or alter profit share where they are in business together.
Tax efficient Investments such as Individual Savings Accounts (ISAs) allow you to earn interest or investment gains free of tax.
Timing of income can be key so it is wise to be consider this when cashing in investment bonds or making pension withdrawals.
Employees could opt for salary sacrifice schemes where part of the salary is exchanged for non-cash or low cash benefits, such as additional pension contributions or an electric car. This can provide valuable benefits in addition to minimising their tax liability.
Your circumstances are unique to you, so please get in touch to discuss your own personal tax position.
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